HMRC issues warning about use of disguised remuneration schemes

HMRC has issued a statement regarding remuneration trust tax avoidance schemes, following a decision by the general anti-abuse rule (GAAR) advisory panel on one of these cases, where a company rewarded its director using loans made through a remuneration trust.

The company claimed a tax deduction for its contributions to the trust and both the company and its director claimed that the loans were tax free.

The GAAR panel agreed with HMRC’s view that entering into and carrying out these arrangements was not a reasonable course of action.

“In our view, the arrangements as a whole are contrived and abnormal and appear to us to serve no purpose other than to avoid tax,” the panel stated.

“There has been a naked attempt to break the connection between the loans to the individual and their activities as a director of the company which have generated the economic value.”

The panel also stated: “We cannot believe that Parliament intended loans to a person from a trust made out of funds deriving from economic value earned by that person’s activities as a director to escape Part 7A.”

Under the arrangements, a company contributes to an offshore remuneration trust and claims the contribution as a deductible corporation tax expense.

The trust deed may have various beneficiaries, such as:

• third parties that have a commercial relationship with the company making the contributions;
• providers of finance to the trust; and
• someone appointed to act for the trust.

The director of the contributing company makes very small loans to the trust, or to someone appointed by the trust. The contributions received by the trust are not used to provide benefits to anyone other than the director of the contributing company through loans made to them on uncommercial terms.

It is claimed that the loans are not connected with the director’s employment with the company. Instead they may say they receive the loans because, as a provider of finance, they qualify as a beneficiary of the trust.

As part of the arrangements a personal management company is set up and controlled by a third party supporting the arrangements or in some cases controlled by the contributing company or its director.

The third party extracts the scheme fee, then transfers the remaining money to the director of the contributing company. Money received by the director is claimed to be a tax-free loan.

The HMRC explained that it may issue anyone using such arrangements which were entered into on or after 17 July 2013 with a counteraction notice under the GAAR, without going back to the panel for a new opinion.

They may also receive an accelerated payment notice (APN) if they receive a GAAR counteraction notice. This means they will have to pay the disputed tax upfront while HMRC continues its investigations.

Arrangements entered into on or after 15 September 2016 may also be subject to a 60 per cent penalty where the GAAR applies.